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Rudi’s View: Analysts Versus Pessimists, The Battle Royale Of 2021?

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 29 2021

This story features CHARTER HALL GROUP, and other companies. For more info SHARE ANALYSIS: CHC

In this week's Weekly Insights:

-Analysts Versus Pessimists: The Battle Royale Of 2021?
-Icarus Explained: Charter Hall
-Conviction Calls
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

Analysts Versus Pessimists: The Battle Royale Of 2021?

Last week, I wrote about how 3/4 of ASX stocks covered by stockbrokers is still trading below analysts' price targets, at a time when many believe the share market is overvalued, see https://www.fnarena.com/index.php/2021/04/22/rudis-view-more-upgrades-more-potential-for-aussie-shares/

This week I can follow up with the fact that a similar discrepancy can be observed through the Buy, Hold and Sell ratings issued by those analysts for ASX-listed stocks. FNArena monitors seven leading local stockbrokers daily. This allows us to collate data that are not available elsewhere.

One set of such data are the total in Buy, Hold and Sell recommendations as carried by those seven stockbrokers, covering in excess of 400 ASX-listed companies. Contrary to what some might believe or speculate, stockbrokers do not always carry mostly Buy ratings, and history shows very distinctive patterns that might provide investors with additional insights.

When lining up all the ratings today, the first observation to make is the total in Sell ratings is near an historical low of 6.3%. The long term average would be above 10% and the graphic below shows it can be as high as 20% which occurred in late 2013, but total percentages of Sell ratings were equally high in 2014, 2015 and in 2009.

As one would instinctively expect, there is a correlation between Sell and Buy ratings. As the graphic above shows, each peak in Sell ratings concides with a low in Buy ratings, and vice versa. Today, both Sell ratings (in grey) and Neutral/Hold recommendations (orange) are as low as FNArena has measured them, in terms of percentages of total ratings, since 2012.

Prior to 2012, we observe a similar pattern in 2010, and in 2008.

The key difference between the situation today and those three preceding periods is, of course, that today share market indices are near all-time record highs, and share prices have clocked up strong gains from last year's pandemic lows, while profit and dividend forecasts are rising and price-earnings ratios (PEs) are well above historical averages.

As such, there is an argument to be made 2021 has a lot more in common with 2006 and 2007, when global optimism was high leading into the GFC. But the general context for analysts recommendations was quite different at that time with Neutral/Hold ratings above 50% (as high as we ever measured them) and total Buy ratings at 33% as low as we've ever measured them, as a percentage of total ratings.

The added observation is that past periods when analysts ratings suggested the share market represented more value than not (through an abundance of Buy ratings) ultimately were followed up by rising share markets. Think the first half of 2010 that was subsequently followed by a rally into year-end. Admittedly, 2011 was not a great year, and that slump lasted until mid-2012. But have a look at the graphic again. That's when total Buy rating surged above 60%.

The second half of 2012 and 2013 saw markets rally strongly.

In fact, if we create an overlay between periods when the share market was not in the mood to party, so to speak, we can identify those periods through the times when total Buy ratings surged above total Neutral/Holds; 2014, second half 2015 & early 2016, early 2017, late 2018 and now the year post April of 2020.

So on the most simplistic of all set-ups, it seems 2021 has placed the local share market in a battle royale between those expert voices and investors who believe valuations are egregiously overwrought, carried by too optimistic profit growth/recovery projections that cannot possibly be met even as the world adjusts and learns to cope with covid-19 and its numerous variations, and stock analysts at major stockbrokerages who continue to see plenty of value and further upside for shares.

If history can be relied upon, that over-sized percentage in Buy recommendations will eventually be followed up by much higher share prices, as has happened on every previous occasion.

Those critics who believe analysts are wrong in 2021 must thus accept the concept of This Time Is Different, which is what they usually quote to support their case it never is different. And that, as they say, is quite the irony.

Analysts' projections are longer duration and completely useless for short term horizons. Investment strategists are increasingly preparing for a period of consolidation (in an ongoing uptrend), if not a corrective pull back in the not too distant future.

The number of technical analysts warning about equities exhibiting more signals of short-term overheating is equally on the rise. They too, in overwhelming numbers, seem to think any correction from current levels will prove but a temporary pause.

For more context around the above, do make sure you also read last week's https://www.fnarena.com/index.php/2021/04/22/rudis-view-more-upgrades-more-potential-for-aussie-shares/

Icarus Explained: Charter Hall

The Icarus Signal is one of several proprietary tools FNArena offers to paying subscribers, and it regularly triggers questions such as "how exactly does it work?"

The latest inquiry specifically asked whether I could use Charter Hall ((CHC)) as a practical example.

Instead of trying to explain The Icarus Signal through Charter Hall in a private communication between Editor and subscriber, I've decided to share it with the broader database, as I am sure many more have similar questions.

First of all: The Icarus Signal is simply an extra tool we offer. It won't suit everyone and certainly not under all circumstances. Having said so, I also know some subscribers are using it as an integral part of their strategy.

In its essence, The Icarus Signal follows through from my initial observation, made many moons ago, that the upside in most banks' share prices is usually limited by the consensus price target.

This is where my personal market sentiment gauge stems from. I compare share prices with consensus targets and assess where we're at. Logical questions to ask include: is there still upside left? Are those targets likely to be raised or reduced shortly? Are share prices anticipating the next upgrades/downgrades?

The practical value of this approach/analysis is shown in the ANZ Bank ((ANZ)) chart below, taken from the FNArena website (Stock Analysis).

For those not yet fully familiar with the FNArena price charts: the grey zone on the chart shows the consensus price target, and how it has developed over the past twelve months.

We can all witness how the target fell to $20, and slightly lower, when times were not looking too bright and since then there has been a steady climb to currently above $29, as analysts are increasingly looking forward to what is widely expected to be a stellar results season for the sector. Coming soon!

If we know change focus to the share price, we see the share price was initially much lower than the falling target and subsequently quickly filled in the gap in late May last year, only to be knocked back again, and then put in another two-phased rally in October-November that once again filled the gap with a steadily rising consensus price target.

Observation number one: when the ANZ share price is trading well below consensus target, it doesn't stay there for long. On the other side of the spectrum: when the ANZ share price rises above target, it tends not to stay there for long either. It is equally easy to establish the share price since November last year has simply followed the rising price target, almost in too perfect fashion.

This is one key reason as to why I like to use the banks share prices in relationship to broker price targets. Under most circumstances, it simply works.

Now, let's be clear about this: I use the banks, all four of them, to gauge market sentiment and to assess whether the index has, maybe, temporarily run too far ahead of underlying fundamentals. Everyone with access to the info on the website can do the same, but how investors otherwise use this information to their advantage is a complete different matter; and not always as straightforward.

For example, we can all now establish that buying ANZ Bank shares, or more shares, every time a large gap opened up between share price and target, this would have been a very profitable strategy. But if we sold out on every occasion the share price rose above target we would equally have missed out on a lot of additional upside.

This is where things can get tricky. We must be able to also gauge the overall context in which these movements and changes take place. So it's not simply a case of sell once the target has been hit and buy when the share price is much lower. That doesn't always work either. Plus it may not suit those portfolios that are built to own shares for a long time.

Complicating matters a little further: the same analysis does not apply to CommBank ((CBA)) whose share price is seldom below consensus target. This is because CommBank's share price carries a premium vis a vis the rest of the sector. Assuming this premium remains in place, it automatically implies that when ANZ Bank shares are at or near target, CommBank shares must be trading well above in order to keep that sector premium intact.

The importance of CommBank in this context cannot be underestimated. It immediately removes the notion that all shares are the same, always and with no exceptions, and that the share market can simply be approached via this simple price target versus share price principle. Instead, this is but one additional tool that can prove handy when used with experience and under the right circumstances.

One of the reasons as to why this principle works so well with banks, under most circumstances, is because the Big Four represent more than 20% of the ASX200. Most investors have exposure, either direct or indirect. Banks are the most analysed and researched sector on the ASX. There is a certain predictability that stems from this.

The general context for other sectors, let alone small-cap and micro-cap stocks is not comparable. Hence: a lot less predictability.

Nevertheless, FNArena developed The Icarus Signal as a follow-through of what initially started with the banks, and we now show those stocks that are trading close to target, above target and well, well, well below target. With the third category: such an observation should make one think why is there such a large gap? Is it maybe because of excessive risk? Or is the market signalling some major disaster or disappointment is but one extra ASX announcement away?

Regarding the first two categories: the best advice, as with any tool or market indicator, is to build up personal insights and experience. As shown with the above examples of ANZ and CommBank, simply understanding the differences between sectors and stocks can become a humongous advantage in itself, as is the fact banks as a sector are still in an upgrade cycle.

Charter Hall

Stepping away from the banks, let's take a closer look at Charter Hall.

Charter Hall's price target has equally risen, and quite spectacularly, since bottoming in mid-2020 at around $9.50 to above $15.60 today. But contrary to ANZ Bank, the share price has not followed suit since the start of calendar 2021. We can blame the bond market for this, even though rising bond yields have stopped being a major nuisance for stocks like Charter Hall in recent weeks.

Prior to the end of calendar 2020, a similar pattern as for ANZ Bank can be observed, with the Charter Hall share price rallying to close the gap with the target, temporarily rising above target, then pulling back even if that rally accurately anticipated the target was cum upgrade. We can see this pattern repeating itself through three similar looking phases (1, 2, 3 on the chart).

Does the Charter Hall share price now offer opportunity and residual upside? Analysts covering the stock think the answer is 'yes'. All targets set by the six brokers are above today's share price (though Credit Suisse's target is only 2% higher) and the calculated average of all six targets is no less than 13.5% higher for a stock offering 2.7% additional return through dividends.

But investors should also note this upside is dependent on Charter Hall achieving strong growth in FY22 (see market consensus forecasts in Stock Analysis), after what looks like a negative reset in the current financial year. And it is more than likely investors are still a bit wary about what exactly the bond market might do in the second half and next year.

As the Charter Hall share price is trading well below target, while forecasts for FY22 are gradually rising (see the purple line in the bottom section of that chart) I'd be inclined to retain a positive view, unless something happens that changes market forecasts dramatically to the downside, which is always a possibility, of course, but not highly plausible at this stage, on my assessment.

Nevertheless, investors should always keep in mind all of the above -forecasts, valuations, share prices and price targets- are highly dependent on what is predicted and what can be predicted. Life and the share market would produce a lot less surprises if everything could be anticipated well in advance.

Finally, as the FNArena website offers full transparency as to which brokers have what price target and forecasts, and why, investors can make their own variations with the information provided. For example, UBS has been the negative stand-out when it comes to Afterpay ((APT)) and when there are only seven targets to combine, one very low target of $36 has a truly depressing impact on the overall average.

FNArena's automated calculation takes the simple average, which includes UBS's input. If you decide you don't want to include UBS, you can simply put the other six targets through a calculator and divide by six. The consensus target ex-UBS thus changes to $135.55 which means the share price is still below it, while the current set-up suggests Afterpay shares are trading above target, albeit not by much.

In similar fashion, there are circumstances in which I tend to take guidance from the top targets only, for example when commodity price upgrades are coming through. Also, older targets do not automatically equal outdated. Sometimes brokers simply see no reason to produce a detailed update, while others are issuing regular, brief updates. It doesn't make the latter more accurate.

It's probably fair to assume that the better one knows the stocks in portfolio, the better one is able to use this extra tool and to integrate it successfully in the investment strategy.

It is equally valuable to remember the numbers behind the numbers are done by humans and based upon assumptions and projections. And, of course, share prices can move on a lot more than simply earnings and valuations.

Conviction Calls

Through its regular updates on engineers and contractors on the ASX, Bell Potter has communicated its three favourites ("key picks") from the sector:

GR Engineering Services ((GNG)); its exposure to junior and mid-tier miners is expected to support record levels of activity in FY21 and FY22
Lycopodium ((LYC)); heavily leveraged to re-opening on the African continent, expected to return to growth in FY22
Monadelphous ((MND)); higher commodity prices are expected to result in higher spending by producers and explorers and Monadelphous will be one of key beneficiaries

Also, sector analysts at Goldman Sachs have returned from a recent trip to Perth with increased confidence the outlook is improving for diversified contractors, drillers, and other providers of services to miners and energy companies.

Goldman Sachs has currently Buy ratings on ALS Ltd ((ALQ)), Emeco Holdings ((EHL)), Worley ((WOR)) and Orica ((ORI)).

Research To Download

-RaaS on Pureprofile ((PPL)):

https://www.fnarena.com/downloadfile.php?p=w&n=8078FE43-C7EF-31B8-D7208497CAE346FA

-RaaS on Pointerra ((3DP)):

https://www.fnarena.com/downloadfile.php?p=w&n=8083B045-0E3C-7FDC-5B675F8B5A41D9F1

-RaaS on Nanovue ((NVU)):

https://www.fnarena.com/downloadfile.php?p=w&n=8089CAB6-0B72-85CB-55FE315C9F9715A6

-Edison on Doctor Care Anywhere ((DOC)):

https://www.fnarena.com/downloadfile.php?p=w&n=8095D27C-D384-04D5-B6D940A56C7CBDBA

-Edison on EML Payments ((EML)):

https://www.fnarena.com/downloadfile.php?p=w&n=809D5F94-FE69-58AA-9ED33A39FFF047E4

-Edison on Kazia Therapeutics ((KZA)):

https://www.fnarena.com/downloadfile.php?p=w&n=809D5F94-FE69-58AA-9ED33A39FFF047E4

(This story was written on Monday 26th April, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
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Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

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CHARTS

3DP ALQ ANZ APT CBA CHC DOC EHL EML GNG KZA LYC MND NVU ORI PPL WOR

For more info SHARE ANALYSIS: 3DP - POINTERRA LIMITED

For more info SHARE ANALYSIS: ALQ - ALS LIMITED

For more info SHARE ANALYSIS: APT - AFTERPAY LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

For more info SHARE ANALYSIS: DOC - DOCTOR CARE ANYWHERE GROUP PLC

For more info SHARE ANALYSIS: EHL - EMECO HOLDINGS LIMITED

For more info SHARE ANALYSIS: EML - EML PAYMENTS LIMITED

For more info SHARE ANALYSIS: GNG - GR ENGINEERING SERVICES LIMITED

For more info SHARE ANALYSIS: KZA - KAZIA THERAPEUTICS LIMITED

For more info SHARE ANALYSIS: LYC - LYNAS RARE EARTHS LIMITED

For more info SHARE ANALYSIS: MND - MONADELPHOUS GROUP LIMITED

For more info SHARE ANALYSIS: NVU - NANOVEU LIMITED

For more info SHARE ANALYSIS: ORI - ORICA LIMITED

For more info SHARE ANALYSIS: PPL - PUREPROFILE LIMITED

For more info SHARE ANALYSIS: WOR - WORLEY LIMITED